A profitable business generates cash that it can deploy in four possible ways. It can invest the money back in the business to grow the profits of the business, or invest in unprofitable projects that squanders the money. To avoid the second of these two options, companies without profitable investments will return the money to shareholders through dividends and share repurchases. Squandering the companies profits is the worst possible option for shareholders and should probably go without saying that companies that do so should be avoided at all costs. Investing the money back in the business is often the most lucrative, because it is the most tax-efficient option. Corporate profits that require paying corporate taxes are delayed, and money re-invested in the business or other businesses after being distributed to shareholders is taxed as capital gains or dividends. Only the reinvested money can avoid taxes, temporarily, in a tax-free account, like an IRA. The trade-off of these two options is usually based on the current tax rate of capital gains vs dividends.
Investors should seek out businesses with investable opportunities that are aggressively plowing profits back into the business. The difficulty of recognizing these companies is that on the face these companies will seem like money-losing business never able to eek out a positive profit. However, in reality their current operations are quite profitable, but the added expenses of investing in the future look like costs. This is one reason focusing on growing revenues instead of profits can be beneficial for a growth company.
Value investors are anathema to these types of companies who don't have a long history of profits, and this poses the greatest opportunity for growth investors to out-perform them.
